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Friday, 4 September 2009

Taking Your Business to the Gym - Managing Creditors

When you are in a situation where you cannot pay all your current creditors you must start to prioritise who you pay, and when you pay them. If you are a retail business for example; then your suppliers are the most important since without them you have no products to sell. If you have credit terms try to extend them, if not, at least attempt to maintain your existing terms otherwise your cash position will get worse. Some may be prepared to offer you extended credit terms for a payment schedule but it must be your judgement call what to ask for and you must be confident that you can manage any agreements. Nothing annoys a creditor more than having agreements continually broken.

In order to make this strategy work you must have a clear and detailed breakdown of your exposure by creditor. You ought to be able to get this from your accounts system. If you don't have this information then you must get it as soon as possible as without detailed understanding of your financial position you will not be able to manage your creditor position. It will require you however, to manage your cash flow a very tightly. I would recommend that if you haven't already you should subscribe to the Internet banking. This why you can see your available funds on a daily basis and can apply them knowing that you have funds available to pay your creditors. Often making weekly payments to creditors' works well as it's often easier to find £250 a week than a single sum of £1000

Based on the fact that you can now identify all your costs you will be able to see easily, your regular payments. In common with most businesses suffering cash flow difficulties the creditors which tend to suffer first are Rent, Rates and Government. It is not surprising therefore that Landlords' tend to get very aggressive with delinquent payers. They will however accept, albeit reluctantly, some variations in how are you pay. So in dealing with your Landlord, I would suggest that you deal with them direct and not through their agent.

Most rent is paid quarterly in advance; you should ask your Landlord if you can pay on a monthly basis. This will be much easier on your cash flow in circumstances where you are likely to be at or near your overdraft limit, and therefore working out of the cash flow generated by your business. Creditors can only be paid against money that has been received. Under these circumstances it will be advisable to cancel as many of your standing orders and direct debits as you can. This will prevent you from going overdrawn and suffering the embarrassment of returned cheque payments, or excess overdraft fees.

The UK Government currently is quite lenient towards tax and VAT arrears as it doesn't want to be seen to be pushing companies into liquidation. However expect this to change in 2010 where the pressure to collect tax revenues outweighs the political pressure to keep companies working.

The most important piece of advice is to talk to your creditors; you won't be the only company they've got who's in trouble but if you explain your difficulties and most importantly have a plan to get out of it you'll most likely get a sympathetic hearing.